Tax credit nation — Politicians are casting new spending as 'tax cuts,' hiding their true cost

With the national debt soaring past $34 trillion, liberal politicians hoping to expand the federal leviathan face a conundrum. How can they convince Americans wary of the effects of runaway government spending—painfully evident in recent elevated inflation and interest rates—to nonetheless support even greater expenditures? As President Biden and others demonstrate, one way is to cast new spending as “tax cuts” instead.

That’s how politicians often describe tax credits, a burgeoning class of federal benefits dispensed by the IRS. For example, in a 2021 speech hailing the temporarily expanded child tax credit (CTC), the president called the policy a “tax cut” 15 times. Despite that rhetoric, the policy actually dispensed far more in new benefit spending than tax relief.

That’s typical, especially when politicians describe “refundable” tax credits. In classic Washington doublespeak, refundable credits are benefit checks from the IRS that exceed federal income taxes paid, belying the normal concept of a “refund.” Sometimes, as in 2021’s CTC expansion, refundable credits are paid even to nonworkers who don’t owe taxes in the first place, making these benefits akin to welfare checks.

Before the pandemic, tax credits were already among the fastest-growing government benefits. According to a Tax Foundation analysis, between 1990 and 2020 the value of tax credits “increased nearly 10-fold after adjusting for inflation, reflecting how lawmakers have increasingly relied on the tax code to administer social benefits.” During those decades, refundable credits made up 60 percent of all tax credits, compared with 40 percent devoted to tax relief. For some tax credits, the tilt toward benefits is even greater. For example, dating back to the 1970s, the Earned Income Tax Credit (EITC) has provided $1.6 trillion in benefits compared with just over $200 billion in tax relief. In 2020, the EITC was one of over 30 tax credits that dispensed $278 billion in aid to 164 million tax filers, with more than half claimed by those making under $50,000—who owe the least taxes in the first place.

During the pandemic, a series of temporary federal laws ballooned tax credits to all-time records. Three rounds of pandemic stimulus checks—which were fully refundable tax credits—provided $11,400 to a typical family of four, costing taxpayers a staggering $859 billion overall. In Democrats’ 2021 American Rescue Plan Act, the CTC, EITC, and health insurance premium tax credits were all significantly enlarged, with the bulk of the expansions constituting additional benefit spending, not tax relief. Later, the 2022 Inflation Reduction Act created, extended, or expanded 20 energy tax credits, including subsidies for the purchase of electric vehicles, whose cost averages around $60,000.

The president and many Democrats in Congress have sought to revive and make permanent some of those now-expired pandemic tax credit expansions—sometimes arguing “It would be a tax increase on families if it goes away.”

But others have more far more dramatic plans.

A review of legislation introduced in this Congress finds over 150 bills proposed by Democrats and Republicans that would create or expand tax credits promoting everything from restaurant revitalization to advanced nuclear facilities. Many proposals favor specific professions, offering subsidies for health care workers, truck drivers, public school teachers, farmers, beauticians, and even local journalists. Others subsidize spending by certain types of businesses, like those that manufacture rare earth magnets, construct power lines, and even purchase personal locator beacons for commercial fishing vessels. Still others promote new green spending—on green landscaping equipment, biomass stoves, insulation, and even E-bikes. One bill grants businesses involved in the marijuana trade access to current tax credits and other tax breaks, while Sen. Bernie Sanders (I-Vt.) seeks to create a new tax credit to offset his proposed tax on “Wall Street speculation.”

The nonpartisan Joint Committee on Taxation correctly notes that such “tax expenditures” resemble “direct spending programs that function as entitlements.” Indeed, the array of new tax credits Congress is considering directly overlaps with dozens of current federal health, welfare, housing, commerce, energy and other programs. In fact, that’s the point. These proposed new tax credit programs are designed in part to assuage concerns about more program spending by adopting the rhetorical cover of “tax cuts.” Tax credits have played an important role in recent American social policy, including by offering incentives for work over welfare. But just because new and expanded credits may be falsely marketed as “tax cuts” doesn’t make them any less costly to taxpayers. 

Matt Weidinger is an AEI senior fellow and Rowe Scholar.